The accountant’s ‘going concern assumption’ – a precondition for the continuity of your financing

In the first article in our series on continuity of financing, ‘The planning and control cycle – the key to continuity’, we discussed the link between the company’s planning and control cycle and the financing policy. We saw that integrating the financing policy in the cycle is an essential condition for being ‘in control’ as management. In this first article, the focus was on the internal process and the dialogue with financiers. In this fourth article however, we highlight another important stakeholder: your accountant. 

The going concern assumption

The assumption above underlies the annual reporting of all companies, regardless of whether they do so under IFRS or Dutch GAAP. The impact on the determination of, and disclosure on, the company’s results and balance sheet is obviously significant. It makes quite a difference to the valuation of the company whether it is fighting for its survival or whether it is ‘business as usual’. 

When is continuity in doubt? 

Using the going concern assumption is primarily a responsibility of the company’s management. However, the accountant does also form an opinion on this, along with the board of the company. In recent years we see accountants displaying an increasing interest in the financing component. The guidelines of the RJ (Dutch Council for Annual Reporting) state that there may be (among other things) uncertainty about the continuity of the company when ‘the legal entity will no longer be able to meet its obligations on its own’ ( i.e. needs financing) and ‘it is not yet sufficiently plausible that necessary additional cooperation will be obtained from stakeholders ( i.e. banks)’. This is the basis of the accountant’s interest in the details of the company’s financing arrangements with its banks.

How does the accountant assess the continuity of financing?

The question the accountant asks himself is whether there is a ‘fully financed business plan’, in other words; whether the company has sufficient resources and financing available to execute the business plan. The analysis starts with the business plan itself (how realistic it is, what is the liquidity margin, does the plan match the realization to date, etc.). Next, the accountant looks at the available financing. In summary, the analysis of financing is primarily about available headroom in terms of liquidity and conditions. Usually, financial covenants are part of the financing conditions. In case there is a possibility that the company will not be able to meet its covenants in the future, uncertainty about its continuity may arise as a breach would entail the loan becoming immediately due. 

What horizon does the accountant use?

Although there are minor differences between IFRS and Dutch GAAP, the minimum period that the board and accountant must use when assessing the going concern assumption is equal to 12 months from the publication of the financial statements. 

This requirement has implications for planning the company’s refinancing. We will illustrate this with an example; 

1) Suppose a company enters into a 3-year financing in March 2023, which runs until March 2026. 

2) The financial year of the company is equal to the calendar year and the financial statements are published annually in May.

In this example, when the company publishes its 2024 financial statements in May 2025, it may already have a problem with the continuity statement. After all, the 12-month counter only starts running from publication date, i.e. May 2025. From then on, the financing has ‘only’ a 10-month term. One way to deal with this is to start the refinancing already at the end of 2024 and thus complete it before May 2025.

However, this is not a very efficient solution. The net result is that the company then has to start refinancing as early as November/December 2024, some 20 months after the closing of the 3-year financing. It is also an expensive solution because the upfront fee for the bank assumes a 3-year term while in this example, refinancing is done after only 2 years. In this case, an end date of the financing in Q3 suits the company better. You may also be able to resolve this issue by taking out financing for a period slightly shorter or longer than the original 3 years. 

Conclusion

The focus by accountants on the continuity statement has continued to increase in recent years. This is an additional argument to properly integrate your financing policy and financing plan into the company’s planning and control cycle. Furthermore, it pays to think carefully about the terms of your financing in relation to the continuity statement, as it is often possible to improve efficiency here. 

Get in touch

Would you like to optimize the continuity of your financing, or concrete advice on how to optimize the term of your company’s financing? Call us, we will be happy to assist you.

Alwin de Haas

Partner Debt Advisory